Creating a sales compensation model is a little like preparing an important meal: The recipes must be appealing, the ingredients precise and carefully chosen, the finished product satisfying to the guest.
However, it’s often the spices—in this case, sales incentives designed to raise productivity—that can spell the difference between fortune and failure. Deciding how best to motivate a sales force is an ongoing challenge for HR managers already tasked with balancing employee needs and the business mission articulated by senior company officials.
“Understanding what the business needs are, where the gaps exist and what needs to be driven to get business from point A to point B—that’s the key,” says Bob Cartwright, SPHR, president and chief executive officer of Texas-based Intelligent Compensation LLC, who advises companies on sales strategies.
In drafting pay incentive programs, HR managers face a series of considerations such as calculating an appropriate ratio of base pay, commissions and bonuses; maintaining interdepartmental collaboration; ensuring seamless communication top to bottom; and making optimal use of technologies. Here’s some expert advice on each of these issues.
HR professionals—many burdened by reductions in staff and resources since the beginning of the recession—are facing greater pressure to help their companies restore diminished revenue streams
The range of incentive strategies available to HR managers includes:
- Quota bonuses.
- Straight commissions.
- Management-by-objectives programs that pay on the basis of specific metrics.
- Ranking plans that reward high achievers but tend to deny bonuses to the lowest-performing sales staffers.
Such incentives are a vital component of any sales compensation strategy. When well-defined, they can motivate sales staff, lift employee morale and generate higher revenues. When disproportionate to base salary, they can be riskier.
“The upside is that incentives work,” says Chad Albrecht, a principal and sales compensation leader of the consulting firm ZS Associates in Princeton, N.J. “The downside is that incentives work—just not always how you intend them. Plans that are 50 percent incentive or more drive every element of the salesperson’s behavior.”
Under such circumstances, with so much riding on building sales volume, temptations to “game” the system can surface, Albrecht says, leading to aggressive promotion of products and services that don’t provide solutions customers need, or in the fabrication of sales results to earn a bigger slice of the bonus pie.
Still, Albrecht adds, incentives offer value to employees and employers.
“Adding incentives in a targeted and focused way will send a clear message to the sales force about what is important to the company and how they can maximize their payouts,” he says. Depending on the industry, a structure that fixes at least 50 percent in base pay is probably a stable foundation for sales compensation.
That can produce other questions HR managers must weigh: Should incentives be available to some but not all of the sales staff? Should there be a minimum performance requirement before incentives are paid? Should a cap on bonuses be applied?
A Call for Collaboration
The best sales compensation strategies aren’t created in a vacuum. While HR professionals are entrusted with compensation design, they should engage a broad advisory network of employees including sales, marketing, finance and information technology professionals.
Compensation experts say sales representatives should be involved in the discussion of program details from the outset. That can make sales personnel feel like they’re an integral part of the company. Better still, hiring HR managers with a background in sales or marketing can influence the development of more sales-friendly strategies.
Consultant Steve Grossman says that while strategy design remains important, how people in various departments—particularly HR and sales—interact and display mutual respect can determine the outcome.
The biggest gap “is HR’s relationships with sales,” says Grossman, who leads the national Sales Effectiveness Practice at Mercer Human Resource Consulting. “They don’t always work as closely as they should.”
Grossman notes that in organizations where HR and sales operations work in complementary fashion, “HR brings value to sales—recruiting, performance management, people issues and development plans. In order to do that, they need to have the expertise.”
Grossman recommends a management alignment that has a dedicated HR business partner reporting directly to the vice president of sales, or its equivalent, with only a dotted-line connection to the head of human resources.
Effectively communicating sales objectives is as pivotal to a sales team as collaboration. Employees in the trenches must understand clearly what executives in the C-suite want, says Dave Kahle, a veteran sales manager and now a compensation consultant based in Indianapolis. There has to be consistency and clarity in the message, he says.
Executives tend to spend much of their effort developing a superior plan and then comparatively little time communicating it, marketing its ideas and reinforcing its objectives in the field, according to industry observers. And feedback from the field is infrequently tapped. Yet sales reps and tion plans and can be invaluable in helping shape and communicate their plans’ objectives.
As Albrecht puts it, however, “trust but verify.
“When you hear something in your feedback sessions with the field, interviews or focus groups, research it with data,” he says. “Analytics often dispute the legend.”
The Case for Technology
Without competent support from IT specialists, adequately tracking and measuring the value of sales incentives becomes a more difficult task. Compensation specialists say up-to-date reporting technology is imperative in charting how compensation strategies work in the field.
“Placing significant amounts of money on incentives requires a robust reporting and payment solution,” Albrecht says. “You need a web-based reporting portal for the reps to see regular reporting on their sales performance and resulting incentive payouts.”
Kahle says lack of technical sophistication can undermine an otherwise strong compensation plan that relies heavily on incentive components. “You can only compensate what your IT systems can easily, fairly and accurately measure,” he says. “Many compensation plans are limited by their IT systems.”
The timing of payouts is a factor in mapping a strategy. Managers must determine the regularity of incentive payments, and that will often be structured as a result of the compensation mix. Plans made up of 75 percent base salary and 25 percent incentives frequently call for quarterly compensation, while those with a 50-50 split may be more often paid monthly.
In such cases, consistency is crucial. The setting of achievable sales targets and commensurate financial rewards shouldn’t vary within a fiscal year. Arbitrary changes to incentive programs can work to their detriment and eventually affect the corporate bottom line.
Cartwright cites one prominent technology company that had established a program of targeted rewards for sales. Sales staff generally earned a high percentage of income from commissions and bonuses, with a smaller portion allocated in base salaries.
The staff performed well and exceeded expectations—and bonus levels—before the end of the fiscal year, Cartwright recalls. As a result, the company raised the quotas mid-year, pushing sales staff to work harder just to achieve the same level of income.
“They completely burned out their sales force, which had been bringing in an ungodly amount of revenue and creating good will with the customers,” Cartwright says. “They ended up running out their best sales people.”
Setting the Budget
As executives devise their fiscal year budgets, they need to solidify incentive programs sooner rather than later, incorporating suggestions from relevant departments and determining as early as possible how to structure and ingrain sales incentives.
Budget-setting this year comes against the backdrop of a still-struggling economy. For many companies, financial pressures won’t ease markedly as the United States and global economies continue their slow crawl toward pre-2007 levels.
“Many people wake up on the Tuesday after Labor Day and realize they’re seriously behind in getting their sales incentive plans ready for Jan. 1,” Albrecht says. “Evaluating the performance of the current plan, interviewing key stakeholders, financially modeling the final plans, communicating the plans and enabling the system to handle the new incentive plan takes a minimum of four months. You should be starting now.”
Keeping the sales team operating at a high level in tough economic times is no small feat. “Sales people get a little down, their jobs are more difficult,” Kahle says. “But it doesn’t mean that everybody has to throw their compensation plans away and reconfigure them.”
Cartwright, a member of the Society for Human Resource Management’s Total Rewards/Compensation and Benefits Special Expertise Panel, says that many corporate leaders are trying to drive base pay down and are linking employee rewards more closely to new business they can generate.
“There are a lot of companies upping the incentives because there is a higher upside for them in terms of rewards,” Cartwright says. However, a problem arises when a company has a system in place and then wants to lower base pay and raise incentive pay. Sales people are not likely to be happy to hear that “you’re going to cut 25 percent to 30 percent of their salaries,” he notes. This change could wind up hurting employers in the long run.
In the current environment, though, some see economic challenge as opportunity, Grossman says. “There is an opportunity for HR to step up and demonstrate its knowledge of, and high level of interest in, sales.”
The author is a freelance business writer in New Jersey.